Unclaimed property rules can apply to lost cryptocurrency

The deadline is approaching soon for many businesses to file their reports on unclaimed property, and increasingly, they might want to include reports about lost bitcoins and forgotten cryptocurrency passwords.

Banks, insurers, retailers and state government agencies are often required to report and remit unclaimed funds, such as unused gift cards. With the rise of virtual currencies such as bitcoin and ethereum, and the ease with which passwords and digital wallets and keys can be lost, unclaimed cryptocurrency could become more of a problem for businesses and their accountants.

“There are states that have adopted rules that would include cryptocurrency, unused bitcoins as an example, as a form of unclaimed property,” said Robert Peters, a managing director in the Duff & Phelps Unclaimed Property and Tax Risk Advisory team. “More and more states are not only looking at it but adopting rules, so that unused cryptocurrency would be included in the definition of unclaimed property.” Before the beginning of November, many businesses are trying to complete their fall filings of accounts and other financial instruments they hold that have gone dormant for a specified period of time, typically three to five years, depending on the state. But there is little uniformity in laws among the different states, so the fall reporting season may involve juggling various due diligence mailing dates and dollar thresholds, along with completing electronic paper filing and payment requirements.

“There’s a major reporting season coming up,” said Scott Regan, a director in the Duff & Phelps Unclaimed Property and Tax Risk Advisory team. “We’re in the midst of it now. The two important dates are October 31 and November 1. There are fully 40 states that have deadlines on those two dates. The problem is that there’s a real lack of uniformity, and the states all have nuanced requirements that make this a headache for corporate accounting professionals at big companies.”

Another complication is the different dormancy periods for various types of property. “That’s the amount of time that a property has to be held before it’s considered to be abandoned and possibly to be reported or remitted to a state,” Regan explained. “There are different notification requirements, or what we in the business would call due diligence. Some states require certified mailings. Certain states have thresholds of over $50 or over $100. Some states want the letters to go out 120 days before a filing deadline, some of them 60. There’s really just a variety of dates, dormancy periods, deadlines and due diligence requirements.”

To bring some consistency to the rules, in 2016 a group known as the Uniform Law Commission passed the Revised Uniform Unclaimed Property Act, but many states haven’t been in a hurry to adopt it. “There have been a number of states that have adopted something that looks like the Revised Uniform Unclaimed Property Act, but adoption has been very slow,” said Regan. “At this point companies have viewed this fall filing deadline as a major headache and certainly quite confusing. For instance, Tennessee just switched from a spring state to a fall state, so it’s a moving target.”

For an individual or business who lost track of their cryptocurrency key or wallet, the lack of uniformity among states could be a problem. “If it went unused for a period of three to five years, depending on the state, the state would have a right to that unclaimed property by the issuing company of the bitcoin,” said Peters. “And don’t think for a second that those companies aren’t being targeted.”

Even though many cryptocurrency exchanges are based abroad, the rules can still apply to the owner if they reside in the U.S. “The rules are where the owner is technically, but the rules are very nuanced,” said Peters.

Cryptocurrency is a relatively new issue, but companies and their accountants have been grappling with unclaimed property rules in more traditional areas for years. Other complexities revolve around loyalty reward programs and gift cards.

“If you’ve bought a saw at maybe Home Depot, you get a reward for every dollar you spend that you can apply,” said Peters. “Typically those types of reward programs are not unclaimed. However, if any of them can be converted in any way or associated with a value that’s equivalent to cash, then it’s treated as unclaimed property. One state specifically has come out publicly in saying that certain loyalty programs are deemed unclaimed property, and that’s my home state of Illinois.”

The changes under the Revised Uniform Unclaimed Property Act could even lead to some confusion for retailers. “In some of these states that have adopted the new rules, previously certain types of gift cards that were not reportable as unclaimed property are now required to be reported as unclaimed property,” said Peters. “A company may think that they’ve been compliant by not reporting, only to find themselves in a bind now that they should have reported.”

Some states are particularly aggressive in auditing unclaimed property and ensuring compliance since it can translate into substantial revenue for them. “Based upon a Supreme Court case, if there is not a known address of the customer or the vendor, then the state of incorporation is the one that’s entitled to that property,” said Peters. “And if you Google ‘unclaimed property,’ you’ll see that Delaware, which is the legal home to over a million companies, has collected over the years billions of dollars as a result of them being the state of incorporation for most of corporate America. As a consequence, they have developed a very aggressive audit campaign because, by their own estimation, over 95 percent of corporations that are incorporated in Delaware in their view are not compliant with the unclaimed property laws. So they have conducted over the last decade or more very aggressive audits, which have secured hundreds of millions of dollars. And many of the largest companies end up paying tens or more millions of dollars because their aggressive audit practices have included estimating liabilities currently under their laws going back 15 years if a company doesn’t have adequate records. So it’s a big deal for companies.”

Delaware is not alone in pursuing the potential revenue from unclaimed property. “What recently happened is not only Delaware a big player in this space, but other states have also taken an increasingly aggressive approach,” said Peters. “They have hired third-party contingent-fee auditors that audit on behalf of multiple states, up to 30 or 40 at a time, seeking recoveries of unclaimed property, of which less than 2 percent actually gets returned to the true owner.”

Companies need to be aware of the changing rules and the varying deadlines for unclaimed property. “Most of the states have compliance reporting in the fall, which is either an October or a November deadline,” said Peters. “All of the states have specific, definitive rules of what and how property gets reported. But most importantly, these rules have dramatically changed over the course of the last several years, so even companies that may be very sophisticated may not be aware of many of the nuances of the changes in unclaimed property reporting. The states view companies that don’t fully comply as the first targets for conducting these audits, so it’s a big deal, and for many companies it’s a huge compliance burden.”

States have grown more sophisticated in identifying potential targets for noncompliance. “The risk is that for most corporations, they either are not compliant, and there are huge penalties and fees for not reporting,” said Peters. “But it’s the single source of what the states look at for purposes of determining which companies are being audited. These states are very sophisticated in identifying what types of industry and company are prone to being not compliant. By way of example, a current audit program is targeting U.S. companies that are owned by foreign parents, because you’ll typically find that the foreign parent is not familiar at all with U.S. domestic unclaimed property rules, and it seems to be a sweet spot for the states to focus attention upon. If you give thought to how many U.S. operating companies are owned by foreign parents, it’s a large population. As an industry, they tend to be less compliant.”

There are also tax implications for companies that tend to deduct such expenses as a cost of doing business, and the accounting rules for revenue recognition also apply. “Most of the corporations have already claimed these amounts as expenses,” said Peters. “Think about it. If you’ve issued a customer credit, you’ve already reduced your sales revenue by the amount of the credit you give to the customer. Same thing if you’ve issued a check to a vendor and it didn’t get cashed. It would be an expense. However, there is a whole series of new accounting rules that were issued on some of the more complicated situations like gift cards. When and how do you record as income that breakage, and the rules for tax and the rules for the accounting are very different from the unclaimed property rules. Basically companies that issue gift cards have to have three sets of books: one for unclaimed property, one for tax and one for what they report in their financial statements. Essentially they have to track what the rules are, by gift card oftentimes, for each of those reporting requirements.”

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